Swedroe: More Evidence Against Active

Each year, Dimensional Fund Advisors (DFA) analyzes the returns from a large sample of U.S.-based mutual funds. And each year, the results are basically the same, with the evidence showing a large majority of fund managers in the sample failed to deliver benchmark-beating returns after costs. 2017’s report is no different.

The DFA “2017 Mutual Fund Landscape” covered more than 4,000 funds—1,050 U.S. fixed-income funds, 1,056 international equity funds and 1,889 U.S. equity funds—and almost $7 trillion of assets under management.

The following table shows the number of funds at the start of each period, the percentage of funds failing to survive the full period in question, and the percentage of funds that outperformed their Morningstar category benchmark for that respective period ending December 2016.

As you can see, active management is clearly a loser’s game, with the large majority of funds underperforming their respective Morningstar fund categories. And these figures are all based on pretax returns. Because taxes are typically the greatest expense for taxable investors (greater than the expense ratio or trading costs), the percentage of winners would be much lower for funds held in taxable accounts.

Perhaps even more shocking are the high failure rates. At the 15-year horizon, more than half the equity funds had disappeared and more than 40% of the bond funds had also. You’ll also note that as the horizon lengthens, the compounding effect of active management’s higher costs increases the hurdles to outperformance—failure rates rise and the percentage of winners falls.